A personal loan is generally an unsecured loan – a form of credit extended to an individual person without the requirement of collateral to secure repayment.
Many homeowners choose to use personal loans to purchase solar panels, but what are the considerations of using a personal loan as opposed to other available types of loans, such as loans secured by collateral, or loans extended directly from solar panel retailers? What about solar leases? And are personal loans ultimately a better deal, or will they cost the homeowner more in the long run?
As with most questions, the answer is: it depends.
Personal Loans Can Be Used for Just About Everything – Including Solar Panel Systems
Because personal loans are extended based primarily on credit score and income, and aren’t designated for a particular purchase the way home loans or auto loans are, they certainly can and often are used to purchase solar panel systems. Use of a personal loan is usually preferable to using a credit card to make large purchases, because personal loan rates are likely to be better and many credit cards will not offer limits high enough to accommodate the purchase of a solar panel system.
However, because personal loans are a form of unsecured debt, the rates are typically higher than secured loan options. This is because with a secured loan the creditor can repossess the underlying collateral if the borrower fails to make his or her payments. Then, that collateral can be resold and used to pay off or pay down the remaining loan balance.
With a personal loan, there is no collateral and so the creditor is agreeing to more risk and charges correspondingly higher interest rates. The more of a risk you are seen to be, based upon credit score and other indicators of financial health, the more you will pay in interest.
Whether you plan to use a personal loan or another type of loan to finance your solar panel system purchase, you will want to make sure that what you pay in interest does not completely cancel out the savings you expect to gain from using solar power.
Loans Specifically for Solar Panels May Offer Lower Rates
Many solar panel system retailers offer their own financing to cover the cost of purchasing and installing a solar panel system. Since retailers are making money off of the purchase itself, and want to induce customers to buy their products, many homeowners will find that they can save significant money by arranging financing with the companies themselves.
If the retailer does not offer financing or the rates offered are high, some banks and credit unions also offer loans that are earmarked specifically for solar panel system purchases. These types of loans won’t be personal loans – instead, they can only be used for solar panels, both purchase and installation, and are secured by the panels themselves.
If a borrower defaults on the loan, the creditor’s remedy is to repossess the solar panels and then resell them.
Solar Panel Systems Can Also Be Leased
In addition to the myriad of loans available to purchase a solar panel system outright, there are programs available that allow homeowners to lease instead of buy, though they are becoming less popular. The benefit to leasing solar panels is that the monthly cost will be lower (usually) than making monthly loan payments. The homeowner also does not have to shoulder the cost of certain repairs, depending upon the specifics of the lease, which takes away some of the uncertainty of maintenance or damage costs.
When looking at the possibility of leasing solar panels, be sure to do all the calculations necessary to determine how much money you will save on your electricity costs compared to the monthly or yearly cost of leasing your solar panel system. And remember that although the monthly cost will be lower than if you purchase with a loan, at the end of the lease term you will not own the solar panels.
So to continue to enjoy any savings on your electricity bill, you will need to lease indefinitely or eventually purchase panels. Still, leasing a solar panel system is a great way to keep monthly costs down and also make sure that the savings in electricity costs each month would make purchasing a system down the road a wise investment.
There Are Many Options – So Shop Around
Remember, there are many options available to you if you’re looking to go solar, including leasing or taking out a personal loan or secured loan. Unlike many other investments, with a solar panel system you should expect to see immediate returns on your investment by saving you money on your electricity bill right away, even as you’re paying on the lease or loan. And with so many options available, it’s a good idea to shop around for loan rates and terms, and to compare what types of loans are available to you from all lenders, including banks, credit unions, and solar retailers.
Author: Jeff Gitlen
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